Greenspan’s Nightmare Is Much of the World’s Dream

Alan Greenspan had a dream, or rather a nightmare. Greenspan seems to have woken up in a cold sweat one morning in fear that the period of “disinflationary pressures” that had kept inflation low since the 1990s was about to end. This was 2007, when he published his autobiographical economic treatise, “The Age of Turbulence.” Despite his well-known love for economic data, and poring over the latest reports from every statistical agency, he did not realize that he was sitting on a housing bubble of epic proportions. Not seeing the bubble (he also missed the prior stock market bubble that accumulated and burst on his watch, causing the 2001 downturn), he could not know that it would soon collapse and cause a very ugly recession, in which inflation would be irrelevant.

This by itself should be enough to question the wisdom of central bankers, since the evidence for both of these world-historic asset bubbles was blindingly obvious once they had reached a certain size. But Greenspan’s nightmare is scary for other reasons, some of which will become increasingly relevant as the world economy recovers.

As Greenspan details in his book, the reason for his nightmare is that the world was depleting its stock of hundreds of millions of unemployed people, including those of the former Soviet Union and also in rural China. In other words, “too many” of them had become employed, and this was allowing for wages of factory workers in China to rise. So long as China had a huge mass of unemployed, wages were held in check, and – according to Greenspan - competition from low-wage production there held down wages in the rest of the world, including even rich countries like the United States. All good! Until the nightmare started.

Is there something wrong with this picture, that one of the world’s most powerful economic decision makers (at the time), dreads the decline of mass unemployment and rising wages among people making 80 cents an hour? What, then, is the purpose of economic development, if not to raise living standards for poor people? Some may dismiss Greenspan’s values as unrepresentative – he was, after all, a devotee of the extreme libertarian writer Ayn Rand. And his autobiographical narrative is rather unusual: Although we learn about his love of baseball, music (he attended the Julliard School), and how he became interested in economics, there is something missing. Most public figures of his stature, and even most economists, would have offered at least a perfunctory paragraph about how his economic thinking was aimed at helping those at the bottom of the social ladder – whether true or not. Greenspan didn’t bother.

But unfortunately Greenspan is not an outlier but a moderate among central bankers. What is worse, their perverse worldview has a hugely disproportionate influence on reporting and discussion of economic issues. As the press has recently reported, wages in China are again rising, due to the additive effect of the global economic recovery and the world’s most effective economic stimulus program, which enabled China to plow right through the world recession with 8.7 percent growth in 2009. The reports are somewhat less negative than they were a few years ago, but Greenspan’s nightmare is everywhere: a dreaded “labor shortage” is forcing Chinese wages up and this will add to inflation. It is not clear what is wrong with a “labor shortage” being resolved in the way that markets resolve other shortages: i.e. the price of labor goes up until quantity supplied matches quantity demanded.

“China has drained its once vast reserves of unemployed workers in rural areas and is running out of fresh laborers for its factories,” reports the New York Times. “Personnel managers here say they are also abandoning the informal tradition of not hiring anyone over 35 — they say they are now hiring workers up to 40 years old, and sometimes older, despite concerns about whether they can keep up week after week with the rapid pace of Chinese assembly lines.”

“Managers can no longer simply provide eight-to-a-room dorms and expect laborers to toil 12 hours a day, seven days a week,” says Business Week.

There is more, but we wouldn’t want to give Alan Greenspan a heart attack.

To its credit, the Times recognizes the positive aspect of rising wages for Chinese workers and also notes that the Obama Administration, which has complained about the Chinese renminbi being undervalued, should welcome this development. An increase in Chinese wages, to the extent that it raises the price of the country’s exports, has the same impact as an appreciation of the renminbi.

But the reality is that the Obama Administration, as well as Congressional leaders, are not really serious about a more competitive dollar. If they were, they could push down the value of the dollar worldwide, rather than trying to blame the Chinese for our overvalued currency. But they don’t do that because the Greenspan/Wall Street view prevails: Anything that lowers inflation is good, whether it’s an overvalued dollar, cheap imports from repressed overseas labor or U.S. workers’ wages stagnating, as they have, for decades.

All this despite the fact that the non-partisan Congressional Budget Office projects inflation over the next 10 years averaging less than 1.7 percent annually – lower than any decade for more than half a century. Imaginary threats of inflation could turn out to be one of the more real threats to the United States’ economic recovery.